Healthcare stocks are among some of the best performing and stable investments for long-term portfolios. Sonic Healthcare Limited (ASX: SHL), the largest operator of pathology medical centres and largest occupational health provider in Australia, is one great example of this.
After a strong run-up in share price over the past two years, the stock has pulled back from its recent highs just above $18. Still, I think this is more of an opportunity to add to positions since more growth is on the way. Below are three reasons why you should stick with your shares and may even want to add to any position you already have.
1) International diversification
The company has worked tirelessly to expand its overseas operations and generates about half of its total revenue internationally. That gives it good business diversification and opens it up to much larger healthcare markets. Just this month it announced it has entered into an agreement to provide pathology services for Alberta Health Services in the state of Alberta, Canada. The public healthcare system wants to work with private businesses to improve the system and reduce costs.
The $3 billion, 15-year agreement could mean about $190 million in revenue annually, which is equal to about 5% of Sonic Healthcare's FY 2014 $3.9 billion revenue. This new business development is similar to the pathology services it provides to the UK National Health Service, the public healthcare system in Great Britain.
In recent years more countries have opened their public healthcare systems to private sector businesses. This is one way Sonic Healthcare can enter a new market and have extensive access to customers and patients.
2) New laboratories to drive innovation and business
The company is investing in a number of new laboratories in Sydney, Melbourne and Brisbane, as well as in the UK and Germany. These state-of-the-art labs will increase the volume and quality of diagnostic testing. This helps the company maintain a strong competitive advantage, especially in some European countries where laboratories don't regularly offer pathology specimen collection services.
3) Financial performance
Since 2011, the company has seen high-single digit revenue growth on the average, but FY 2014 was especially good with revenue up 12.3% and reported net profit gaining 14.9%. Part of that gain is from advantageous currency conversions. Its international business benefits the company when the Aussie dollar is weaker.
Looking forward, consensus forecasts are for earnings to rise a solid 8.5% annually over the next two years. It's a steady growth engine for shareholders and the stock pays a 4.0% partially franked yield. I think that Sonic Healthcare could be a good defensive stock for many investors who may have some growth stocks, but need more balance for longer-term portfolio returns.
